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Managing political risk as part of business growth strategy

Geo-political trends and events in other countries can affect your business and its international strategy. Having leaders who can assess and manage political risks is critical so your company can survive and thrive in new markets.

If you’re selling internationally, having a solid risk management in place is a solid part of your growth strategy. Even if you’re not operating outside of Canada, today’s hyperconnected world with supply and value chains spread across many countries means your business can be affected by events half a world away. To stay competitive, Canadian companies of all types and sizes must consider how to manage those risks as part of their business plans, so they can tap into the opportunities. And they must have the right people in place to navigate and embrace risk.

“The world has become irrevocably connected,” Dr. Parag Khanna, founder and managing partner of global strategy group FutureMap told the Fortune Global Forum audience in Toronto on October 16th. “We have to be very careful in how we deal with authoritarian regimes. [But] we have to appreciate that countries like China and Russia are looking for stability and to focus more on economic improvement.”

Having leaders prepared to embrace political and economic complexities is key to remaining competitive in the global economy, suggested Khanna.

"If you're not engaging in the supply chains that are bringing Asians closer together," said Khanna. "You're missing out on the vast majority of global trade growth today."

Growing through risk management

With risk comes the potential for great rewards. You can position your business for international success by understanding the political risks it faces and making a plan to manage them.

Political risks and the changing role of business leaders

Two panel discussions at the Fortune Global Forum in Toronto examined risk management as part of a successful international strategy. Navigating and anticipating risks in a hyperconnected global economy can help your business create a culture of resilience. But the role of leaders has become more complex and more political as a result, said Ursula Burns, Chairman and chief executive officer of VEON, a global telecommunications giant based in Amsterdam.

“In the past, it was facts and figures about your business, but now CEOs have a bigger responsibility,” Burns, a former Xerox executive, told business leaders at the Fortune 500 event. “They need to have a point of view. It used to be a pride point not to have a point of view.”

An EDC survey of Canadian exporters conducted last year found executive influence was number one driver of business success outside of Canada:

79% of successful international companies surveyed say their executives are highly-effective at selling outside of Canada.

73% of companies say they have executives committed to international growth.

75% say their executives are willing to take risks to grow.

How political risk affects your bottom line

Many of the top global risks facing Canadian businesses involve geopolitical trends that can have a direct impact on your revenues or your ability to do business in certain markets and regions.

For example, if the U.K. cannot reach a Brexit deal with the EU by the March 2019 deadline, a disorderly Brexit may lead to the reintroduction of tariffs on goods entering Europe from Britain and increase other financial and bureaucratic costs of operating in the EU for Canadian firms located in the U.K. This could remove an important gateway country for Canadian businesses that want to expand to Europe.

Similarly, the general rise in protectionist trade rhetoric and policy around the world could have implications for Canada’s economy, which relies on international market access for Canadian companies to succeed.

Understanding supply chain risk can help you thrive

Additionally, with supply and value chains now spread across many countries, any dispute or disruption in one link will affect countries elsewhere along the chain.

Supply chains are also more technologically connected, creating opportunities for weak links and disruption from cyber attacks that can pose ripple effects.

The return of rising interest rates is also having an impact on over-leveraged emerging markets. For example, the currencies for Turkey, Argentina and South Africa have all suffered steep drops in value since the beginning of 2018. This can impact the buying power and ability to pay for customers of Canadian companies in those markets.

Global companies need a "licence to operate"

One of the biggest risks facing firms today is reputational, noted Andrew Liveris, former chairman and chief executive officer of Dow Chemical, at the Fortune Global Forum in Toronto.

“Business has a new licence to operate,” said Liveris. “The court of public opinion is instant. Inclusion now means that the entire ecosystem has changed. The fat cats of society are seen as bad people. We have to have a personality that says we care about all of these constituencies.”

Liveris made the comments as part of a panel called CEO Leadership in an Age of Disruption at the gathering of world business leaders. There was unanimity on the panel that business leadership today requires a both political astuteness and a constant awareness of public perception.

"The mechanisms by which you can comment on things is the fundamental change and the expectation that you have a point of view," added panelist Steve Mollenkopf, chief executive office of American telecommunications firm, Qualcomm. "I think being a CEO today is probably like running for office 20 years ago. What we work on is very important not only to the U.S., but also to China, so you have to be a public figure and you have to have a point of view."

First steps to creating a risk management plan

Risk is inevitable. But planning and preparing for it can make your company more agile, innovative and successful.

The first step is identifying the political risks that can impact your business. Consider larger geo-political risks, such as the rise of protectionism in many countries recently. But also look at specific country risks, which tend to have a greater impact on the operations of small and medium sized enterprises. They include categories such as legal and regulatory changes, restrictions on movement or conversion of money, expropriation and political violence.

Once your company has identified the major risks it faces, you will be ready to start developing your risk management plan, including prioritizing the risks and assigning responsibility for them.

Another key to managing political risk is diversification, especially given recent trade concerns both internationally and within North America.

Certain risks may require you to explore new financial tools, such as credit or political risk insurance, or building a foreign exchange policy that includes EDC’s Foreign Exchange Facility Guarantee to manage the risk of currency fluctuations.

You don’t have to be an expert in geo-political affairs to build a plan to manage political risk for your company. Tools likeEDC’s guide to risk management to get you started. You can also get help from professionals such as your company’s insurance broker and other financial professionals.